Sustained and balanced growth; maintain "buy"

Hejing Pacific Group (HJT) released contract sales figures for August and overall performance was dismal (August contract sales: 7.2 billion yuan, down 25% from a year earlier). Meanwhile, the company's contract sales in the first eight months rose 29 per cent year-on-year to 71 billion yuan, meeting only 58 per cent of its full-year contract sales target of 124 billion yuan. Although the company's contract sales performance was poor in August, we are still optimistic about the deep penetration of Hexing Pacific in the Greater Bay area and the core cities of the Yangtze River Delta, as well as the sustained and balanced growth of its development business and leasing business. We maintain the company's 2021-2023 EPS forecast of 2.44 pounds per share, 2.87 dollars, 3.36 yuan, and maintain the "buy" rating and target price of HK $14.40 (35% discount based on the 2021 forecast of net assets per share of HK $22.20).

High-margin urban renewal projects provide support for profitability

Heijing Pacific 1H20 gross margin remains at a high level of 30 per cent in the industry, which we believe is mainly due to the company's leading position in urban renewal in the Greater Bay area. By the end of 2020, Hejing Pacific has participated in 34 urban renewal projects, with a total floor area of 22 million square meters and a saleable value of RMB 650 billion. In the first half of the year, the company won three new projects in Guangzhou, and its urban renewal project reserve is further enriched. At the same time, the company plans to launch a new standardized system in the second half of the year to improve operational efficiency.

Taking into account the sufficient salable value provided by the high-margin urban renewal project and the continued improvement in operational efficiency, we expect the company's gross profit margin to stabilize at a relatively high level of 30-31% in 2021-2023.

Leasing business constitutes a sustainable source of income

Hejing Pacific's business continued to grow evenly, with 1H21 rental income (including hotel operating income) of RMB 785 million, a year-on-year growth rate of 61 per cent. By the end of 1H21, the company operated 10 shopping malls, 9 office buildings and 22 hotels. With the opening of another 25 shopping malls and 11 office buildings in 2021-2023, we expect the investment properties of Hop King Pacific to enter the harvest period, and rental income is expected to increase significantly over the next three years (according to our estimates, the compound growth rate in 2021-2023 is about 33%). We believe that the rapid growth of rental income, especially in high-line cities, will contribute to the long-term development of the company.

Maintain "buy" with a target price of HK $14.40

We offer a target price of HK $14.40, a 35% discount to our 2021 net asset forecast of HK $22.20 per share (considering its deep penetration in the Greater Bay area and core cities in the Yangtze River Delta, and the sustained and balanced growth of its development and leasing business, we give the company a discount of 61% below the historical average). Maintain "buy".

Risk tips: 1) scale expansion is slower than we expected; 2) profit margins decline; 3) rapid expansion leads to an increase in financing costs.